Carrier Global Corporation (CARR) on Q1 2021 Results - Earnings Call Transcript
Company Representatives: David Gitlin - Chairman, Chief Executive Officer Patrick Goris - Chief Financial Officer Sam Pearlstein - Vice President of Investor Relations Operator: Good morning, and welcome to Carrier's First Quarter 2021 Earnings Conference Call. This call is being carried live on the internet, and there is a presentation available to download from the Carrier's website at ir.Carrier.com. I would now like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir. Sam Pearlstein : Thank you, and good morning, and welcome to Carrier's first quarter 2021 earnings conference call. With me here today are David Gitlin, Chairman and CEO; and Patrick Goris, Chief Financial Officer. David Gitlin: Thank you, Sam, and good morning everyone. Starting on slide two with an overview of the quarter. Q1 was a great quarter for us and an early indication that a global economic recovery is underway. Areas of our portfolio that have been performing well have continued to improve and those businesses and verticals that were acutely impacted by the pandemic are showing early indications of recovery. Overall, volume came in stronger than we planned. Reported sales were up over 20%, including organic growth of 17% driven by another very strong quarter in North American Residential, which was up 50%. We also saw a strong growth in commercial HVAC and transport refrigeration. All of our segments contributed to the organic growth in Q1 as the organization continues to execute well on our growth initiatives, including the aftermarket which grew close to double digits. Notably, compared to the first quarter of 2019, we grew sales about 6% organically. This was coupled with strong order trends leading to a healthy backlog at the end of the quarter. Orders were up over 30% compared to last year, driving the organic backlog up 13% sequentially and up close to 20% year-over-year. We produced $608 million of adjusted operating profit, up approximately 40% year-over-year. Given supply chain constraints, we are incurring some additional inflationary pressures and higher logistics costs and meeting customer demand. We are working to mitigate these headwinds through additional cost and pricing actions. Patrick Goris : Thank you, Dave, and good morning everyone. Please turn to slide five. As Dave discussed, Q1 was a great start to the year. Sales of $4.7 billion were up 21% versus the prior year. Currency was a 4 point tailwind for sales in the quarter, about $150 million. On the top line we saw a return to year-over-year organic growth in almost all of our businesses in Q1 and all three segments exceeded their organic growth expectations for the quarter. Organic sales growth of 17% was significantly better than we expected and March was particularly strong across our businesses. Adjusted operating profit was up 39% compared to last year and operating margin expanded 170 basis points. Strong sales growth and benefits from the Carrier 700 were partially offset by investments. Results also included some higher freight costs and a product trouble issue at a minority JV. Price cost in the quarter was about neutral. Earnings conversion was better than the high teens I shared with you in February, driven by the stronger than expected sales performance. We delivered 21% conversion despite the one-time items we previously discussed. The loss of buyer related income, the impact of deferred and equity compensation and lower conversion on currency. cyclical: Margins were up 50 basis points in the quarter compared to last year. We continue to meet customer demands, but are incurring some higher costs to do so including air freight. We expect operating margins to improve as growth in the higher margin North America truck trailer business accelerates. Flipping to slide eight, organic sales at the fire and security segment grew 3% and both the products and fuel businesses grew at similar rates. Within the products business which represents about 60% of the segment sales, residential and commercial fire continued to be solid while access solutions in our industrial businesses remained challenging. Of note, the product business saw a significant pick up in the month of March, leading to a strong end of the quarter. Our fuel business Chubb generated organic sales growth of about 4%. The growth was largely driven by Europe and order rates were strong especially in Asia. As you can see on the slide, Chubb booked its largest installation order ever. Strong Carrier 700 performance helped drive a 220 basis point margin improvement in this segment. David Gitlin: Thanks Patrick. We are pleased with a very strong start to the year. Though much work remains to be done, we are confident in our raised guidance for the balance of the year. With that, we'll open this up for questions. Operator: . Our first question will come from the line of Julian Mitchell from Barclays. You may begin. Julian Mitchell: Hi, good morning. David Gitlin: Good morning. Julian Mitchell: Maybe just wanted to circle back on the margin guidance, so you did a low 20s incremental margin all in Q1. Looks like the guide for the year may be impaired similar to that figure. So just wanted to understand, sort of as you look out over the balance of the year versus Q1, it sounds like price cost isn’t very different from the first quarter, but refrigeration margins should improve. So maybe help us understand some of the other moving parts around maybe the phasing of cost savings and investment spend over the remaining nine months. Patrick Goris: Yes Julian, good morning, Patrick here. I’ll answer it as follows. Reported conversion in the first quarter is about 21%. For the full year we expect reported conversion to be closer to 25%, adjust that for buyer and currency and the one-time items from last year, we get to 30% for the full year. We expect reported conversion to improve from here on out, and so in future quarters we expect that conversion to improve from the 21% up and that for the full year as I mentioned, closer to 25% earnings conversion reported, operationally closer to 30%. In terms of the investments, we did about 40 million in the first quarter. I think it will be pretty much evenly split throughout the year and so I don't expect big swings from an investment point of view throughout the quarter. I think you also asked about the input costs compared to our prior guidance, you know our prior guidance with several tens of millions of dollars of incremental headwinds from inflation and the current guide, that went up by another $70 million or so, so $70 million. And our current guide assumes that we're offsetting that with about $70 million of incremental pricing. And so from a timing point of view, for the full year price costs will remain neutral. In the second quarter that maybe the one quarter where price cost is a little bit unfavorable. Julian Mitchell: Thank you very much. And then maybe secondly, just focusing on that refrigeration segment, the incrementals as you said were way down a little bit, perhaps in the first quarter, some mix and supply chain issues. Maybe help us understand how quickly those improve over the balance of the year in terms of getting that refrigeration incremental up. Patrick Goris: Yes Julian. So within refrigeration which had a good sales growth quarter, the growth was as we said, particularly container, international truck and trailer commercial refrigeration. Those carry a lower margin than our highest margin North American truck and trailer business. We expect North America truck and trailer would actually perform – was at high single digits in Q1. We expect that growth to accelerate from here on out, and so for refrigeration we expect the earnings conversion to improve from here on out. We expect the margins to improve starting in Q2 and for the full year for that segment we expect segment margins to be about 14%. Julian Mitchell: Great, thank you. David Gitlin: Thanks Julian. Operator: Our next question comes from the line of Andrew Obin from Bank of America. You may begin. Andrew Obin : Yes, good morning. David Gitlin: Good morning, Andrew. Andrew Obin : Just a question on the sales guidance and the organic increase. How should we think about the impact of recent price increases, because the scope of price increases that we saw, I think in March was I think 5%, 7% across the industry inversely applied and it seems that most of them will become effective in May and June. So how do you incorporate that in your outlook? Patrick Goris: Yes Andy, so we have announced price increases throughout our businesses. The timing of which and the exact yield of that course is always a little bit different than the actual announced price increase. The way you can think about it is of the 1.5 point increase in organic growth for the full year at the mid-point, so going from 5% organic to 6.5% organic growth at the midpoint, a little less than half of that relates to incremental pricing. That gives you give or take $70 million of incremental pricing that we’ve assumed in our current guidance, which offsets the $70 million incremental headwind on input costs that I referred to earlier. The balance of the increase in organic growth for the full year is really in HVAC, both resi and commercial, some of that of course includes that price, and in transport refrigeration. Those are the areas where we've really pushed up our outlook for the year in terms of organic growth. Andrew Obin : That was a great answer, thank you. And the second question I have for you, with the recent stimulus bill, I think you guys have highlighted – train has highlighted, we’ve heard it from other folks. You know a lot of money is going to schools. I think something to the tune of $67 billion a year for the next three years. I think the last stimulus, 70% of this money that have been spending on capital projects, right. There’s this designation that it should go for fair quality improvement, HVAC system improvement. When we talk to the folks in the industry, people have a really hard time getting their hands around what it actually means. You know I know that it hasn't been too long, but do you guys have a framework of how to think about the impact of this money in the school vertical (a) this year, and what does it mean for demand for HVAC refurbishment upgrades over the next two years. Thank you. A - David Gitlin: Well, Andy we think it's significant. You look at the $1.9 trillion stimulus package, $130 billion of that went toward school re-opening and then if you look at the President's new proposed infrastructure bill, the American Jobs Plan, it includes an additional $100 billion for schools. So how and when that gets spent will remain to be seen. Obviously it needs to flow from the federal to the state to the local school districts, but it's significant because the GAO had a report that said 40% of the school districts have insufficient HVAC. So when you look at that potential $230 billion of spend, we think a material amount of that will go towards upgrading the HVAC systems, because it's long overdue when it's needed. K3-12 is an important part of our business. It represents about 10% of our sales in North America and applied in light commercial. We’ve come out with a very targeted kit offering, which makes it easy for the 16,000 school districts across the country to make a selection and move quickly to implement it. We have a dedicated sales team. We have innovative solutions that we've now come forward with things like ABOUND and our OptiClean solutions and we also think it's important because these are sustainable solutions. So how it plays out this year and next, you will have to see the specifics, but we do think this will provide us with multi-year tail end for our HVAC business. Operator, can we have the next question – oh! Sorry. Go ahead Andy. Operator: Our next question will come from the line of Josh Pokrzywinski from Morgan Stanley. You may begin. Josh Pokrzywinski : Hey, good morning guys. A - David Gitlin: Hey Josh! Josh Pokrzywinski : Okay, so maybe just first question on residential. You know you mentioned the strong sell-in’s – you know sell-through still good, but not quite as high. Backlog still high, so maybe that the channel was still low, but how are you thinking about 2Q here. Can you guys match sell out in 2Q or is inventory for your distributors brimming to the point where maybe they needed to de-stock a little bit. A - David Gitlin: Well 2Q Josh still feels strong. You know we came in with a nice backlog into 2Q. We do think that it's going to be hard to track quarter-to-quarter. You almost have to step back and look at the full year. I think what we're going to see is normal growth rates for the year with abnormal calendarization. So what we saw in the first quarter was sales up 50% and what we're looking at for the first half is sales probably up around 35% in the first half and then given the very difficult compare, given the strength we have in the second half of last year, the second half is probably down closer to 20%. So we're raising – we had originally thought the year would be low to mid-single digits. It's clearly looking like it's in the mid-single digit range for the year, which is not an abnormal kind a year. What's really encouraging is that movement was very strong in the first quarter. It was up over 20% and movements continue to be strong here in 2Q. Now the inventory levels as you said, they are higher you know than normal. They are at 30% year-over-year, but having said, if movement continues to stay at the pace that we've been seeing it, we think that we would end Q2 inventory levels probably 10% to 15% higher than 2019, which is the better compare, which is not completely abnormal. Housing starts continue to be very strong. They'll be up 11%, 12% this year and we're seeing continued pent up demand, and a lot of the strength we saw or at least a material amount of strength we saw in the first quarter was furnaces, which would not really indicate for a lot of pre-stocking and inventory. So look, we're going to have to keep an eye on it of course, because you know third quarter was up 50, fourth quarter up 25, this quarter up 50. While we continue to take share, we continue to support our customers, we continue to see strong movement, so we feel well positioned certainly in 2Q and then we'll have to see how the rest of the year plays out. Josh Pokrzywinski : That was exceptional. And then I guess just thinking on Carrier 700 and you guys are in the midst of a pretty substantial transformation across the board, including in trying to build out a service organization, I think that comes at a point in time where maybe there’s some bottlenecks out there, whether it's you know finding new suppliers for sourcing initiatives, hiring folks, training them up. Anything that you're seeing out there that you know maybe kicking some of those initiatives to the right, simply because it's hard to onboard new suppliers, new technicians, you know whatever it is across the board. A - David Gitlin: No Josh. Those are not – I mean look, there's challenges on Carrier 700, but is not driven by the ones you mentioned. Clearly we're seeing inflationary headwinds coming our way. Commodities, we're seeing some headwind there. Of course input costs from our tier one to our two suppliers, we have to manage that. Logistics remain a challenge and frankly we have to manage productivity, because there are some labor shortages in places like our Carrier Build Tennessee factory where we're in the process of hiring a few 100 people there and we got to keep up with not only the short term demand, but the sustained demand that we see coming over the coming quarters. So there's challenges out there and I'm really proud of the operations team. I think they are managing it best-in-class, but it's certainly not without its challenges. But I think the things you mentioned, we're actually trying to get out in front and one of the things that I think has helped us is that as we saw this demand coming, we actually pre-stocked some inventory. Patrick and I authorized a bit of inventory in December and then in January to make sure that we had parts that we were going to need, some buffer stock in the face of a lot of the demand influx that we were anticipating. Josh Pokrzywinski : Got it. Good call on that. I appreciate the color. I’ll get back in line. A - David Gitlin: Thank you. Operator: Our next question will come from a line of Nigel Coe from Wolfe Research. You may begin. Nigel Coe: Thanks. Good morning everyone. A - David Gitlin: Good morning, Nigel. Nigel Coe: Hey! So the commercial HVAC growth of mid-teens wouldn't have been something we would probably guess coming into the quarter and that’s likely mostly down, but some of it is in the U.S. So I just wondered, could you probably just dig in to the next level in some of the moving pieces you know within that mid-teens. And then you talked about light commercial selling in 2Q on a much, much easier comp. Maybe just talk about how you see commercial evolving over the balance of the year? Thanks. A - David Gitlin: Sure. Let me start on the applied side. You know we were very pleased with that mid-teen growth we saw on the commercial applied side. Obviously China had some easy comparisons with sales up there. Sales in China were up over 100%. We were pleased with the growth in Europe. Europe was up in the mid-teen range. North American equipment was a watch item. We did have a couple of very short term issues in one of our factories that probably is a short term issue, so we'll catch up with that here in 2Q, so North American equipment for us was actually down a bit, and the aftermarket in North American was up double digits. So I think the North American equipment is poised for a nice recovery, especially when you look at the ABI, the Architectural Billing Index. You know we looked at 11 months below 50 and it got as low as 29, but now we've been above 50 and in March it was at 55, which is a very, very good level. So of course a big leading indicator of commercial construction activity, so we're very encouraged about what we're seeing in the applied space in North America and especially in the verticals like data centers and warehouses, education, which I mentioned on the stimulus package and then healthcare, so. And we continue to lean in to aftermarket growth, which we anticipate will be up double digits and the backlog is strong. Light commercial, it was down a bit. You know it's sequentially improved from the fourth quarter, so every quarter light commercial has been getting better, but as restaurants and retail start to open up, we're very encouraged by what we're seeing with order trends. So it's really set up for nice growth. We were thinking that light commercial would be a mid-single digit. It's probably going to be up around 10% this year and what we're seeing in light commercial is strong order trends. We're seeing improved backlogs. I mean it’s not a – it’s obviously a very easy compare, but the backlog is up 100% and what's really encouraging is field inventory levels are down. They are down about 35%. So it's set up for a nice rebound as we get into 2Q and beyond. Nigel Coe: Amazing, amazing, thanks for that quick detail. And then on the queued up position, so congratulations on putting in for VRF whitespace, but what’s the plan? Are you going to globalize that product and bring it to the U.S. and then how does CHIGO fit in with Toshiba, your relationship with Toshiba. Thanks. A - David Gitlin: Yeah, we look at CHIGO as a first step of many. You know you look at the entire VRF space and international light commercial, we see that as a $25 billion market out in 2025, and the reality is if you look back in 2015, VRF, I mentioned this in the prepared remarks, but VRF was half the size of the traditional chiller market and now they're about the same size, so you can imagine the CAGER for VRF is exponentially higher than some of the other markets, and the issue that we had is we really did not – we didn't have design capabilities and we were not really a manufacturer, and that's not what we are as an OEM, we’re not a distributor. So this was one of the few but important plays that we could make to become and design and manufacturing VRF player with a great operation there outside of Guangzhou in China. So very, very pleased. It gets us to become a more meaningful player. We've been clear that we do have partnerships with folks like Toshiba, with Madea that we're very proud of. I mean these go back decades and they are great partners. Are there opportunities to more optimize those into win-win relationships? We frankly believe that there are and we’re in very constructive discussions with those partners, but we see the CHIGO acquisition enabling that to not only be a play for China, but for it being a global player. Nigel Coe: Thanks David. A - David Gitlin: Thank you. Operator: The next question will come from the line of Jeffrey Sprague from Vertical Research. You may begin. Jeffrey Sprague: Thank you. Good morning everyone. A - David Gitlin: Good morning Mr. Sprague. Jeffrey Sprague: Yeah, I've gotten two Sprague’s this earnings season. It’s like my Italian roots are coming through. A lot covered. I just would – I’d be interested in maybe just Dave circling back to kind of the Healthy Buildings, the dynamic. Can you just elaborate a little bit more on how you're actually kind of defining that, because you know does that pipeline mean it’s kind of around the ABOUND opportunity or – just kind of flush it out a little bit for us, how you differentiate the pipeline there versus what you're seeing kind of maybe in the core business? A - David Gitlin: Yeah Jeff, the way we try to, we try to take a very strict and disciplined definition, which is these are sales that we would not have gotten prior to the focus on really Healthy Buildings. So a lot of the IAQ type offerings that really became much more prevalent you know when the pandemic hit, we really put that in the healthy building $500 million pipeline that I talked about. So examples would include OptiClean you know. We have orders for more than 30,000 OptiClean units and we put that in the healthy building category. When we sell upgrades that are really driven by filtration or UV light, we put that in there and you know we're really, really excited about the new ABOUND offering. You know Bobby George and the team have been working on this with almost a skunk works type group over the last six months or so to come out with a differentiated digital offering and that will be a big enabler for Healthy Buildings, because what it'll do is it'll make it visible to the end consumer, how safe and healthy is the indoor environment. You know, we think about it like an Intel inside strategy, where you know you start to have end consumers ask for certain chips in their PC's. What we're going to see is certain consumers having expectations that before they make a restaurant reservation or go in to a commercial office building or come back in a crowded indoor spaces, they're going to have an expectation that they can see the health of the indoor environment and that the building managers taking steps to mitigate any anomalies with that, and that’s exactly what ABOUND will enable. So we will put ABOUND subscription sales in the Healthy Building category as well. Jeffrey Sprague: Yeah, well that was the second part of my question. You talked a little bit about chiller service attachment which maybe kind of part of this equation, but are you seeing a different kind of service attachment rate with these offerings, and I guess you kind of alluded to even some new evolving business models there. Maybe just a little more color on that. David Gitlin: We anticipate so Jeff, but it's too early to say. I mean we really – we've been working for the last few months in the first quarter on pilot projects with the commercial office building. We were very excited with the Atlanta Braves and welcoming - as they welcome fans back to Truist Park. That was a really profound win for us that we are excited about. We worked with a school, a K3-12 school outside of Atlanta as well. So we've really been proving out the technology. We made it an official offering earlier this week. So it's too early to say in specific response to your question, but it's clearly – we have this tier blue edge offering and we believe ABOUND will drive more of recurring revenue through subscription sales, but also pull through more LTAs and more of our elite blue edge offerings and equipment sales. Jeffrey Sprague: Right, thanks. I’ll pass the call. David Gitlin: Thank you. Operator: Our next question will come from the line of Deane Dray from RBC Capital Markets. You may begin. Deane Dray: Hey, good morning everyone. David Gitlin: Good morning, Deane. Deane Dray: I just want to follow up on Jeff’s line of questions there, just to clarify the definition of the indoor air quality. Is all the school upgrades of the HVAC system because that is a COVID related concern and probably would not have had the kind of focus had there not been the pandemic. Are you including that in the indoor air quality opportunity? David Gitlin: No, we’ll base it more on the offering that we provide as oppose to the driver behind it. So if we go to a school district and what ends up happening is it's a much more kind of an energy efficient play, which is what we do all the time, and the modernization is more around energy efficiency. We probably would not put it in that healthy building category, but if the offering is driven by the underlying premise of driving more healthy and safe indoor environments, yes, we would put those in. Deane Dray: Okay, good. So that's helpful in terms of framing what's in that indoor air quality pocket. A - David Gitlin: Yes. Deane Dray: And then second question is, I know it's relatively small, but it did get called out, is this operational issue at a minority owned JV. Just if you could flesh out what the issue was? Does it broadly put the spotlight on Carriers portfolio of minority JVs and what's the approach and time frame to address that, you know the number of them there and how might that get rationalized. David Gitlin: Well, on the second part your question Deane, yes, I mean one of our big themes for Carrier since we spun has been focus and simplification. So if you think about our JV portfolio, we started with 40 minority JVs and we’ll end this year closer to 32. So we have been taking a very clinical approach to reducing the number of JV's for various reasons. There are some that really propose risk, but not a lot of value to the overall business. So we have reduced some of those, and then there are some that we still have that we are in discussions to you know reframe them a bit, especially if it's in a very strategic area for us and we're not consolidating sales or EBIT, that's an area that we're in discussions with our partners on. With respect to the specific product issue that was in one of our minority JV's. I wish I could say that in things we control we've never had our own product issues, so you know we're not disparaging the JV because of that one issue, but it does highlight that we do want to have more controls in place in some of our critically strategic areas. Deane Dray: Okay, thank you. Patrick Goris: And Deane in terms of the size, it was about a penny. Deane Dray: I appreciate it. Thank you. Operator: Our next question will come from the line of Joe Ritchie from Goldman Sachs. You may begin. Joe Ritchie: Yes, thank you. Good morning everybody. David Gitlin: Good morning Joe. Joe Ritchie: Since we are on the topic of Healthy Buildings, I may as well add my question as well. So it seems like you've grown your opportunity. I think you highlighted 500, this $500 million this quarter, I think it was $200 million last quarter. But it seems also like the opportunity is pretty broad based. Is there any commentary around like where you're really seeing the uptick, and then also $500 million probably isn't the starting point? I guess how you're thinking about the addressable opportunity for you guys? David Gitlin: Well, we think Joe that the opportunity you know is significant and it is, it's broad based across a number of verticals. So clearly education, K3-12 is a key focus area, but even universities. We've been in discussions with universities as they look at their very – they have a very broad footprint, most of the universities in the United States but globally as well. Healthcare and hospital is a key focus area for us as well. Commercial office buildings, as people reimagine the future of work and various models there, they do want to make sure that if people come back into the office to providing a safe indoor environment. Stadium, you know I mentioned the deal with the Braves, but we are optimistic that that would be the first of other deals we would do. So anywhere where you have kind of people in a somewhat crowded indoor environment, there are starting to be more discussions. I had dinner with a friend who owns a restaurant a couple of weeks ago and he wants to add OptiClean units for his various restaurants, so we're seeing a lot of interest. You know the question we get a lot is going to be how sticky it is. We know that sustainability is a sticky theme. In healthy, once the pandemic is more under control globally, will Healthy Building be a thing of the past and I think that especially when you think about our ABOUND offering, that is one of the keys to really making sure that this is a sticky trend for years to come. Because what it's taught us is that COVID isn't the first airborne transmitted disease and it won't be the last and people are much more in tune with having safe indoor environment. So to make it visible to them, and ultimately use AI and MO to anticipate and correct any deficiencies with indoor environments, I do think this is a trend that will withstand the test of time. Joe Ritchie: That’s helpful color Dave, thanks. And then maybe my follow-on for Patrick, I mean you gave a lot of details around the guidance for the year. I guess as I try to look it like slightly differently. The first quarter came in much better than we expected at the segment level. I think about $100 million better. The guidance for the full year only kind of implies like maybe half of that at the segment level. And so I guess I’m just trying to understand like the conservatism that's baked into the rest of the year versus like you know what you expect from incremental headwinds for the rest of the year. Patrick Goris: I think Joe, the way you can look at is . One element is within residential HVAC we mentioned that some of the strength we've seen, we believe could have been some of the acceleration of the seasonal inventory build. So that would not necessarily change the full year outlook for resi, although we did raise resi a little bit from the year, but not as much as the H1B. The second element, this is for fire and security we saw a very strong end to the quarter in March and so it's a quick turn business. We have not updated our full year outlook for that segment at this point, and so would take another card there. In terms of profitability, full year as I said $70 million more price, offsetting $70 million more of headwind and then a little bit more volume leverage from what we raised. We did dial in a little bit more of the air freight costs as well for the full year. So that's kind of the – a little bit more detail and color around the full year outlook. Joe Ritchie: Got it. Thanks Patrick. I appreciate it. Patrick Goris: Thank you, Joe. Operator: Our next question will come from the line of Jeff Hammond from KeyBanc. You may begin. Jeff Hammond: Hey, good morning guys. David Gitlin: Good morning, Jeff. Jeff Hammond: Just a clarification on North America applied, how much of that was you know the watch side or more the supplier issue versus kind of demand still being choppy there. David Gitlin: Now it had nothing really. We did as we transferred over on a 3PL and we made it. We had a couple of issues as we did that. So it was a very short term issue which is now behind us. Jeff Hammond: Okay, and then any supply chain issues leaking into the transport piece. We've heard a lot about you know just truck, but anything you are seeing in transport. David Gitlin: Yes, I mean the supply chain issues are fairly broad based. I mean there are electron – there are electronic issues, there are raw material issues, even things like resins that we put into our injection molding process. We have to work with a couple of key tier one suppliers in our transport refrigeration business that are key watch items. So I think the team is managing it well, but there are some things that the team is having to do. In some cases air freight over ocean which we would have done in the past, so it's not without its cost and challenges, but just like the rest of the portfolio, I'm really, really proud of how the team is working with the supply chain to manage them, but there are certainly issues that the team is battling every day. Patrick Goris: Jeff, we are meeting customer demand. We are just having a little bit more input costs in doing so including freight. Jeff Hammond: Okay, great. And then if I could just sneak one more in. Maybe just you know we are kind of through a lot of the pandemic, reopening, demand seems to be you know inflecting here. And just beyond, maybe just the you know minority interest stakes, how are you thinking about portfolio reshaping at a bigger level in some of the businesses that maybe don't fit longer term, thanks. David Gitlin: Well look, we said that we would take a very clinical and structured review of our existing portfolio and I can assure you that we started that on day one and that's something that will continue forever. So we continue to look at every aspect of our portfolio and put it through a regular set of lenses to determine, is it the right kind of area for us to invest and improvers or it is worth more in the hands of someone else and we would use those proceeds to invest elsewhere. So we continue to look at all aspects of our current portfolio. We are very, very energized by the playbook we have in place. We have great confidence that those are bored in our strategic roadmap. We have our three pillars of growth, funded by Carrier 700. We have these two big ecosystems we are focused on, you know healthy, safe and sustainable buildings and cold chain solutions, so we'll continue to look at rounding out those portfolios. We put our toe in the water with a bolt on M&A with CHIGO and we’ll look at, obviously we're looking at others as we go forward. And then we of course know there's more transformational opportunities out there in the portfolio, but we're really energized by our ability to execute on the strategic roadmap that we have in front of us. Jeff Hammond: Okay, very helpful. Thank guys. David Gitlin: Thank you. Operator: Our next question comes from the line of Steve Tusa from JPMorgan. You may begin. Steve Tusa: Hey guys, good morning. David Gitlin: Hey Steve. Steve Tusa: What was price and cost in the quarter for you guys? Patrick Goris: It was about neutral Steve. Steve Tusa: And actual price capture? Patrick Goris: A little bit it – well, less than a point. In the quarter itself it actually was – in the quarter, in Q1 itself it was less than half a point. For the full year it will be a little less than a point for the total company. Steve Tusa: Yeah, okay, got it. And you were neutral on commodities, okay. When you talk to the channel and I know we kind of talked to your channels well obviously. But when you talk to others in the channel, maybe outside of Watsco, what are they saying about what’s actually what’s happening on the ground. The sell-through is pretty good. Is there a little bit of catch up from you know people not be able to get product last year, so they kind of scheduled it for the spring. I mean what’s, what are you hearing from like some of your key contractor customers? David Gitlin: Well, we hear from really both our distributors and our contractors is that demand is strong. That its real demand and that they're pushing for the right mix from us so they can support the customers. Obviously new construction continues to be extremely strong and then what you're seeing is we had anticipated that in previous down cycles what you would have seen is more repair over replacement. We actually haven't seen any of that. We've actually seen a lot more replacement of entire units, entire condensing units or entire systems and I think it's because partly because there's more stay-at-home, and partly because there's more liquidity in this down cycle than we saw in previous. So people are prioritizing the spend they have on their homes and we're also seeing people buy a lot of new homes and often when you buy a new home, one of the things you do in your inspection is look at the HVAC system. So that's probably driving some of it. But what we're hearing, we were actually on the phone recently last week with a key distributor down in the Texas area and they said that they're very encouraged by what they're seeing from their contractors. They are encouraged by Carriers ability. It's not that we haven't had our hick-ups, but our ability to support them and I think that's helped some of the share gains that we've seen, and we'll have to see. Obviously there's inventory out there in the channel, but we'll have to see if movement can continue to be north of 20%, then it’s an encouraging sign. Steve Tusa: And you mentioned share gains, would you at the margin you know get everybody else’s kind of raising price dramatically. I mean would you at the margin you know make targeted efforts with price to allow distribution to kind of you know go after some share in local markets, selected. David Gitlin: We’ve been consistent on a price that I think others have announced. We came in with a price increase coming into the year. We announced for resi up to 7% increase in June. So look, there’s clearly inflationary pressures on there on our side, and we really have no choice but to raise prices, not only in ready, but across the portfolio and I think customers expect it. So we'll be doing that and I think it seems like from what I've read from our peers that that's an industry wide phenomenon. Steve Tusa: Is there anywhere where price is down, that’s my final question, sorry. David Gitlin: No. Steve Tusa: Okay, great. Thanks a lot. David Gitlin: Thank you. Patrick Goris: Thank you, Steve. Operator: Our next question will come from the line of Gautam Khanna from Cowen. You may begin. Gautam Khanna: Yes, thanks, good morning. David Gitlin: Good morning. Gautam Khanna: I want to ask about the competitive environment. You know last year we had a couple resi competitors that couldn't produce to meet the – you know for example. Lennix mentioned on their call that they've seen some issues among resi competitors as well and I was curious, are you guys seeing that and if so, kind of how is that manifested in your orders, if there's any way to quantify it. David Gitlin: Yeah look, we will never comment on a competitor. We have a tremendous amount of respect for our competition and I think we all go through various challenges during different times. So I think that we are all experiencing various challenges. I think our operations team is going to great lengths to support our customers and I think that because we did pre-stock some inventory anticipating the ramp, I think that’s helped us. I know our team has been working around the clock to support operationally. We’ve tried to be very strategic with our supply chain and our own operations to have some level of redundancy, so if there is an issue in one place, we can ramp up somewhere else. So we are not by any means flawless. We have our challenges, but I do think the operational performance has helped up pick up a bit of share along the way. Gautam Khanna: Thanks. Operator: Thank you. And that’s all the time we have for questions-and-answers today. I like to turn the call back over to speakers for any closing remarks. David Gitlin: Okay, well thank you. Thank you everyone for joining. Clearly we are very energized by the first quarter and what we see in our performance and some of the macro trends, so we are energized by the quarter and what lies ahead and we encourage you to please reach out to Sam with any follow-up questions. Thank you, all. Operator: This concludes today's program. You may now disconnect.CARR Ratings Summary
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Related Analysis
Carrier Global Gains 3% Following Citi’s Upgrade
Carrier Global (NYSE:CARR) shares rose more than 3% intra-day today after Citi analysts upgraded the company to Buy from Neutral, raising their price target to $74 on the stock.
The upgrade is based on several key factors and assumptions. They project an expected EPS of $3.10 in 2025, translating to a price target of $74, which is based on a 24x multiple of the expected EPS.
The analysts anticipate that Carrier Global will be largely through its transformation process by the start of 2025, positioning it as a focused “pure play” HVAC company with an improving valuation multiple. They acknowledge the known headwind from Viessmann's weakness, which accounts for approximately mid-teens percentage of Carrier’s projected fiscal 2024 revenue. However, they expect that synergies from the Viessmann acquisition and broader productivity initiatives will largely offset this weakness.
The analysts forecast that core markets for Carrier should grow at mid-single digits over the next few years, with the U.S. residential and global transportation sectors reaching a bottom while the commercial HVAC sector remains robust. While the analysts note that Carrier is still a work in progress and improvement may not follow a straight line, they commend the company for being well-managed with a leading market share in a highly favored end market, seeing potential for further upside.
Carrier Global Initiated with Outperform Rating at Oppenheimer
Oppenheimer started coverage on Carrier Global Corporation (NYSE:CARR) and gave it an Outperform rating with a $51 price target. The company has performed well since its spin-off from UTC in 2020, and the analysts believe there is potential for even more value creation through various means.
The company now has more freedom to allocate growth capital towards areas such as aftermarket, digital tools, product development, and expanding its footprint. The analysts predict that the company will see increased leverage on its investments through productivity gains, share gains, and the development of new digital capabilities.
Additionally, the analysts believe that portfolio management opportunities could lead to a re-rating of the company's value, and that its ability to deliver above-average incremental growth and improve free cash flow conversion could help narrow the company's valuation discount compared to its peers.
